More and more people see the advantages of offering their services as independent contractors rather than working for others. As an independent contractor, you’re your own boss and can choose your clients, working hours and conditions, and gain tax advantages. 

But even though you say you’re an independent contractor, you must meet the legal requirements for Revenue Canada to see it that way. Explore the advantages of being a contractor and how to assess whether you actually qualify as “freelance” according to Revenue Canada.

What is an Independent Contractor?

A self-employed contractor works in a business relationship with their clients and meets certain conditions and factors. For example, they send invoices to the client instead of receiving a salary.

What is an Employee?

Employees depend on an employer and have certain entitlements under employment standards legislation, such as minimum wage, overtime, vacation, statutory holidays, and so on. An employee’s employment relationship is governed by the Employment Standards Act or common law if there is no contract.

How to Determine Your Status

If the Canada Revenue Agency (CRA) audits your client, they may determine that your relationship with them isn’t that of a contractor, but more like that of an employee.

If this is the case, the employer must pay past amounts for benefits and deductions like Employment Insurance (EI) and Canadian Pension Plan (CPP), along with penalties and interest. The directors of the employers may even be personally liable.

So, ensuring the relationship is that of an independent contractor is extremely important. This can be determined by reviewing factors such as:

• How much control the worker has over when and how they do their work
• Who owns tools and equipment, and whether the contractor hires other individuals like sub-contractors or assistants
• The level of financial risk, management, and investment in the contractor’s business
• The worker’s ability to make a profit, and other factors such as written contracts, etc.

Benefits of Independent Contracting

Individuals benefit in many ways from establishing their relationships with businesses as contractors. Some of these include:

• Control Over Working Conditions – Independent contractors can control their working hours and conditions.
• Multiple clients – They have the freedom to work with more than one client at a time.
• Potential for Higher Profits – Contractors have the potential to earn more instead of relying on a fixed salary.
• Contract Flexibility – While employers usually provide employee benefits, independent contractors can still negotiate contract clauses regarding workplace safety, benefits, and insurance.

Businesses also gain advantages by hiring independent contractors. Employers may even prefer this relationship because it allows them to avoid making source deductions of EI, CPP, income tax, health tax, and workplace safety insurance premiums.

Tips To Help Ensure Your Services Are Recognized as an Independent Contractor

The following tips will help you ensure that you are considered self-employed by Revenue Canada:

• Establish Terms as a Freelancer – Before commencing services for an employer, ensure the terms of your service clearly reflect that you are a freelancer.
• Maintain Consistent Services – Ensure that your services don’t change over time. This helps prevent you from being considered an employee instead of a contractor.
• Create a Termination Provision – Ensure you have a termination provision in your agreement that provides advance notice before termination. Courts may still determine that “reasonable” notice is required for a contractor, but it’s better to make it clear at the outset.

In Summary

While there are many benefits to being an independent contractor, it’s essential that the CRA legally recognizes you as one. This way, you’ll avoid your client facing financial penalties and legal ramifications under legislations such as the Income Tax Act, Employment Insurance Act, and Employment Standards Legislation.

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